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The effect of health insurance coverage on personal bankruptcy: evidence from the Medicaid expansion

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Abstract

This paper investigates the effects of health insurance coverage among low-income people on personal bankruptcies at the county level and the state level, based on the hypothesis that having health insurance reduces the risk of medical out-of-pocket spending and consequently decreases the likelihood of financial distress. In order to estimate the causal effects of health insurance coverage on personal bankruptcy, I exploit the Medicaid expansion under the Affordable Care Act as a source of exogenous variation in health insurance coverage and use it as an instrumental variable. Using bankruptcy filings from the US Court, I find that an increase in the share of low-income people with health insurance reduces Chapter 7 bankruptcy rates both at the county level and state level. The implied magnitudes of my estimated impacts are quantitatively important.

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Notes

  1. Legislation enacted in December 2017 effectively repealed that requirement, starting in 2019.

  2. Chapter 7 bankruptcies fell sharply after 2005, before they started increasing in 2007, due to the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which made it more difficult for higher-income individuals to qualify for Chapter 7 bankruptcy by more closely examining the filer’s ability to repay their debts. The law caused many people to file Chapter 7 bankruptcy before October 2005, when most provisions of the act started to apply.

  3. Wing et al. (2018) review difference-in-differences studies and state that “the literature has not reached a consensus on the best way to perform inference in [difference-in-differences] models” (p. 462).

  4. As pointed out by Gross and Notowidigdo (2011), Himmelstein et al. (2009) argue that 62% of bankruptcies are medical in their data, though they include in the figure respondents who did not list medical costs as a primary cause of their decision to file for bankruptcy.

  5. SAHIE’s definition of insured is “Is this person currently covered by any of the following types of health insurance or health coverage plans? (1) Insurance through a current or former employer or union (of this person or another family member), (2) Insurance purchased directly from an insurance company (by this person or another family member), (3) Medicare, for people 65 and older, or people with certain disabilities (SAHIE does not report insurance rates for people over 65 since over 98% of people over the age of 65 are insured), (4) Medicaid, Medical Assistance, or any kind of government-assistance plan for those with low incomes or a disability, (5) TRICARE or other military health care, (6) Indian Health Services, (7) VA health care, and (8) Any other type of health insurance or health coverage plan.”

  6. The SAHIE data are available for six income categories: all incomes, as well as income-to-poverty ratio (IPR) categories 0–138%, 0–200%, 0–250%, 0–400%, and 138–400% of the federal poverty threshold, three sex groups (female, male, both), four race/ethnicity groups (all races, non-Hispanic White, non-Hispanic Black, Hispanic), and six age groups (0–18, under 65, 18–64, 21–64, 40–64, 50–64).

  7. Bankruptcy data from 2010 to 2012 are purchased from Public Access to Court Electronic Records (PACER) at https://pcl-legacy.uscourts.gov/statistics (U.S. Bankruptcy Courts 2019), but they are consistent with the 2013–2018 data.

  8. The data list a small number of filings in the incorrect jurisdiction. Following Hynes (2012), for these cases, I summed the number of bankruptcies for a given county regardless of where the petition was filed.

  9. Most Chapter 13 bankruptcies are dismissed because the debtor fails to satisfy the conditions of the court mandated repayment plan (Lefgren and McIntyre 2009).

  10. It is important to point out that personal bankruptcies are an imperfect measure of financial distress because of the costs. Many people who cannot or will not repay their debts do not file for bankruptcy because of the attorneys’ fees for a bankruptcy filing. According to Foohey et al. (2017), attorneys’ costs are on average $1200, paid up front, to file a Chapter 7 bankruptcy. For a Chapter 13 bankruptcy, debtors typically pay $3200 for attorneys, but these fees are paid over time as a part of the case’s resolution.

  11. All nonelderly adults, whether childless or parents, with incomes up to 100% of the FPL were covered prior to 2014 in Delaware. In Massachusetts, parents with incomes up to 133% of the FPL were eligible for Medicaid, and childless adults with incomes below 100% of the FPL were able to obtain limited coverage under the MassHealth program. New York’s Family Health Plus program covered childless adults with incomes up to 100% of the FPL and parents with incomes up to 150% of the FPL. Vermont Health Access Plan provided coverage to childless adults with incomes up to 150% of the FPL and parents with incomes up to 185% of the FPL.

  12. In California, 48 counties (out of 58) expanded prior to 2014. Of these 48 counties, 10 counties expanded in July 2011, and 38 counties expanded in January 2012 (Caswell and Waidmann 2017). I use January 2012 for California in my state-level analysis, because that is when most counties in California expanded.

  13. New Jersey and Washington were technically early expansion states, but in these states existing enrollees were transferred to new programs, and no new beneficiaries were enrolled prior to 2014 (Sommers et al. 2013).

  14. For my graphing purpose, I exclude states that expanded before and after January 2014, as the implementation dates are not uniform among these early and late expansion states. These excluded early expansion states are California, Connecticut, Minnesota, and the District of Columbia, and late expansion states include Michigan, New Hampshire, Pennsylvania, Indiana, Alaska, Montana, and Louisiana.

  15. My first-stage regression produces essentially difference-in-differences estimates. A major challenge in difference-in-differences analyses is separating out preexisting trends from the effects of a policy shock. Although it is a common practice in difference-in-differences studies to check robustness by including unit-specific time trends, I do not employ specifications with county/state specific time trends in this study. Wolfer (2006) points out that including unit-specific time trends might either exacerbate biases, depending on the specific dynamic response, especially when only a few observations are available before the policy shock. This study covers a short period 2010-2018, and most Medicaid expansions occurred in 2014, leaving only 4 years for the preexisting-trend period. Several researchers also argue that using unit-specific time trends does not always serve as a good robustness check (e.g., Meer and West 2015). Indeed, Borusyak and Jaravel (2017) state that “[they] do not recommend including unit-specific time trends in any difference-in-differences or event study specifications” (p. 17).

  16. New England Division includes Maine, Vermont, New Hampshire, Massachusetts, Connecticut, and Rhode Island; Middle Atlantic Division includes New Jersey, New York, and Pennsylvania; South Atlantic Division includes Maryland, Delaware, West Virginia, Virginia, North Carolina, South Carolina, Georgia, Florida, and District of Columbia; East South Central Division includes Kentucky, Tennessee, Alabama, and Mississippi; West South Central Division includes Oklahoma, Arkansas, Texas, and Louisiana; East North Central Division includes Wisconsin, Michigan, Ohio, Indiana, and Illinois; West North Central Division includes North Dakota, South Dakota, Nebraska, Kansas, Missouri, Iowa, and Minnesota; Mountain Division includes Idaho, Montana, Wyoming, Colorado, Utah, Nevada, Arizona, and New Mexico; Pacific Division includes Washington, Oregon, California, Alaska, and Hawaii.

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Acknowledgements

The author is grateful to two anonymous referees for their useful comments and suggestions.

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  1. College of Business, Arkansas Tech University, Russellville, AR, USA

    Masanori Kuroki

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Correspondence to Masanori Kuroki.

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Appendix

Appendix

Table 7 Types of bankruptcies
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Fig. 6
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Personal bankruptcy filings per 1000: 2010–2018

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Fig. 7
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Personal Chapter 7 bankruptcy filings per 1000: 2010–2018

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Fig. 8
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Personal Chapter 13 bankruptcy filings per 1000: 2010–2018

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Fig. 9
figure 9

Timing of Medicaid expansion by state, 2010–2018. Most California counties expanded before 2014. New York, Vermont, Massachusetts, and Delaware have adopted Medicaid expansion under the Affordable Care Act but will be treated as control states due to their generous eligibility levels prior to the ACA Medicaid expansion

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Fig. 10
figure 10

Share of population with health insurance: 2009–2017

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Kuroki, M. The effect of health insurance coverage on personal bankruptcy: evidence from the Medicaid expansion. Rev Econ Household 19, 429–451 (2021). https://doi.org/10.1007/s11150-020-09492-0

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